Fed rate cuts: Wall Street is starting to have buyer’s remorse

Analysts at Bank of America and JPMorgan, which was one of the few banks to correctly predict the half-point cut last month, have cut their expectations for the November policy meeting and now see a quarter-point cut instead of another 50 basis points.

But others on Wall Street warned that the situation called for even more caution from the central bank, as further easing could re-accelerate a still-robust economy, threatening to push up inflation again.

For example, veteran market forecaster Ed Yardeni told Bloomberg on Friday that the previous half-point cut was unnecessary and that no more cuts were needed, adding that “I think some Fed officials regret doing so much “.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, said that while he still expected a quarter-point cut next month, he warned that if the next jobs report and inflation data be too hot, then the Fed will probably hold. on more relaxation.

“Otherwise, the employment update suggests the Fed may revisit the caution of tapering at all in November — although a pause is not our base case,” he wrote in a note.

Lawrence Lindsey, a former Fed official who also served as director of the National Economic Council during the George W. Bush administration, told CNBC on Friday that policymakers need to consider how their rate cuts were followed by a rise in the 10-year Treasury yield, saying it may be a sign they’re doing something wrong.

“So my suspicion is that they will probably have to move on to the next meeting,” he added.

Further rate cuts, he warned, would validate expectations for persistent inflation, which is supporting demands for big wage increases from workers at Boeing and East Coast ports.

Indeed, top economist Mohamed El-Erian said that “inflation is not dead” and that the Fed must maintain vigilance on price and labor market stability rather than focusing solely on supporting full employment .

Similarly, former Treasury Secretary Larry Summers posted on X that nominal wage growth, a key driver of inflation, does not appear to be decelerating and that the jobs report shows that any further rate cuts require a cautious approach.

“With the benefit of hindsight, the 50 basis point cut in September was a mistake, though not of much consequence,” he wrote. “With this data, ‘no landing’ as well as ‘hard landing’ is a risk @federalreserve needs to consider.”

Apollo Chief Economist Torsten Sløk, who has been firm in his view that rates will remain higher for longer, said in a note on Saturday that there was no need for more Fed tapering, citing the strong economy, the low rates the consumer locked in earlier, the budget. spending and investing in AI-related businesses.

Even before the jobs report, other data suggested that the Fed’s rate cut last month was already having a significant impact.

For example, the Institute for Supply Management’s services activity index for September came in stronger than expected.

“Businesses are already starting to see activity and orders rebound as the Fed takes its foot off the brakes,” Comerica Chief Economist Bill Adams said in a note Thursday.